Real estate is one of the most common investment targets for Australians. There are good reasons for that. Australians tend to buy property earlier in life. They also invest into SMSF (self-managed super funds) to prepare for retirement more than any other investment class. Real estate investments are popular, because any property is a tangible object, no matter how much of an investment return it provides.
The Australian real estate market is currently a great investment. It demonstrated the highest price growth in 2013 in 6o years! The growth rate slowed down in 2014, but mortgage interest rates are still low and the economy is on the rise. For this reason, real estate continues to generate interest among investors. Any potential buyer should consider several important points before committing to buy, be it his first property or next.
Reasons to buy are important
People all buy real estate for different reasons. There are first-time home buyers, investors looking for capital growth, passive income seekers. Personal use is the common reason for buying houses or condos in Australia. Only the buyer's needs define property requirements in this case: property size, location, number of beds and baths. Any other investment strategies are secondary to finding a good home for the buyer and his family.
Investing for capital growth is a good strategy in under-performing markets with good growth and development prognoses. Lower purchase price and rapid market growth result in rising property value and growth of capital initially invested. The difficulty here is that it takes a real estate magician to accurately identify markets with capital growth potential. Real estate markets are prone to unexpected occurrences and forces that may destabilise or drive the price up. Reasons could range from restrictive by-laws, industrial developments to mere fashion.
It is often easier to identify markets that are NOT potential capital growth-worthy and thus exclude them from the investment plan. For example, these include the markets where:
The rapid increase in price is already happening;
The market growth has begun a year or more before;
The influx of population and thus, buyers, is constant, like in large markets of Sydney, Melbourne etc. In this case though, some market segments (specific suburbs, for example), could still be of potential interest.
These markets have already undergone their rapid growth stage years or even decades ago. They are not likely to provide significant capital growth again in the near future.
Capital growth investment strategy is a long-term one. It may take 5 or more years to really yield beneficial results. If an investor thinks she will need to sell the property within the first 1-3 years, a capital growth strategy is of little interest. In this case, one may focus on investment return instead. The most common way to get investment return, or “yield”, is to rent the property out. Two indicators are significant here: a gross rental yield and a net rental yield.
The purchase price of the property divided by total rent received in one-year period is a gross rental yield. The net rental yield is the return one receives from the property after deducting all property ownership costs from gross rental yield. These costs may include mortgage payments, taxes, insurance, strata fees, repair costs. Net rental yield is a better indicator of a potential investment return and needs to be considered when assessing property prices. The yield would depend on the location and type of property, as well as on the negotiating power of the estate agent renting the property out.
When the costs of keeping a property are lower than its net rental yield, the resulting monthly return may become stable income. This is especially important for Australians in retirement. Any losses associated with renting the property can be turned into tax credits, lowering the amount of tax to be paid.
The buyer's individual circumstances and cash flow will ultimately dictate which investment strategy he chooses. The ideal investment combo is a property that provides high rental yields and long-term capital appreciation, combining capital growth with investment return. It is not easy to find one, but the effort should be made anyway. Thorough research on all suitable suburbs and specific properties helps a lot.
Research is power
Once the investment strategy is clear in the buyer's mind, it is time to find a good fit for a potential purchase. It helps to identify the target city and research its suburbs and available properties for sale, visit potentially interesting properties. Every house visit should be documented with property conditions, photos, and asking price. The resulting portfolio of potential properties will make it easier to identify good value options. The target suburb may have neighbours that are also potentially good targets. It pays to do research on the surrounding suburbs as well, including their populations, infrastructure, security and transport.
Each property in the target suburb will have its own unique features and peculiarities. Some may require renovations, some may have unfinished basements, verandas, obstructed or undesirable views. If the property requires renovations, a professional contractor will help to assess their costs. The most important feature of any property still is the extent to which it fits the investment strategy chosen by the buyer.
Buyers looking for capital growth will assess the suburb to identify potential that may drive house prices up in the near future. Gentrification, infrastructure expansion (new schools, malls, parks), increases in industrial activity, falling rental prices are all worth noting. They can all point towards the target suburb being either a great or a poor choice for capital growth investment. If there is a building spurt is going on, the future supply and demand could be either in favour or against the investor. With all of these points in mind, working out a reasonable price for the target property should be easier.
Research into real estate takes time. Not all Australian buyers are confined to just one market – say, Perth or Sydney or Melbourne. Those who decide to look around the country for great investment have a lot of work to do. Even research within one city of the locality can be overwhelming. It is important not to rush! Equally important is seeking good advice from professional estate agents. They will help with research keeping the buyer's needs and strategy in mind.
Emotions won't prevail
Once the agent and the buyer find the property to buy, there is one last step left before making an offer. The buyer needs to evaluate the impact his emotions may have on the purchasing decision. A common one is the lowest price that overshadows the downsides of the property. The downsides requiring fixes will likely negate the price difference in the long term. Another may be a hot belief in the growth potential of the property, which may not stem from actual real estate dynamics in the given suburb.
Emotional attachment to property is not inherently bad, but it needs to be carefully evaluated and kept in check. Having an estate agent by one side will help the investor immensely in seeing the property as impartially as possible. If the property is evaluated based on the investment strategy of the buyer, emotion will not stand in the way of making a rational decision. If a property is not a good fit, it is wise to keep looking. Real estate is a fast-changing world where opportunities may present themselves when one least expects them.